Who Makes the Call on Goodwill Impairment Charges: CEOs or CFOs?

Abstract

Goodwill impairment involves subjective estimations and a high degree of managerial discretion. However, it remains unclear whether CEOs or CFOs have more influence on goodwill valuation. We address the question by investigating the relation between executives’ equity incentives and goodwill impairments. We find that firms with higher CEO or CFO equity incentives report lower annual goodwill impairments. Interestingly, the negative relation is stronger for CFO equity incentives. Further, we conjecture and find that the relative influence of CEOs and CFOs on goodwill impairments differs in a setting involving executive turnovers. Specifically, we find that a new CFO has no significant effect on impairment decisions. In contrast, a new CEO is associated with a higher probability of recording a large goodwill impairment, presumably to engage in “big bath” accounting. Taken together, our results suggest that, while incumbent CFOs are in charge of routine review of goodwill valuation, new CEOs have the final authority on large-impairment decisions.